Comment by jacquesm | Hacker News Reader

Comment by jacquesm | Hacker News Reader

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You are basically saying that there is no reason to incorporate, and that simply isn't true.

Your name can be on the paperwork, your company can be in debt, it can even go bankrupt, as long as you did not do something called 'mismanagment' or 'fraud' you should be good. Being a minority shareholder implies that even if you had wanted you could not have stopped it from going the way it did, unless you happen to be a signing officer of the company able to act on his own, but that does not detract from the above.

Puncturing the corporate veil to go after the private assets or credit status of an officer of the company is a very high threshold to meet, in the case of 'peanuts' debts like the one we are talking about here nobody in their right mind is even going to try.

On top of that, he would have to be an officer of the company that has put up a personal guarantee for any of the debt to rub off, if you do that you're silly and I assume that since there is a corporate lawyer involved here and that the company is a Delaware corporation that he's well protected from that angle.

I'm not suggesting that at all. There are many good reasons to incorporate, including the ability to walk away from catastrophic debt. But there are personal consequences to doing so that the corporation can't do anything about.

A real life example: I am involved in the management of a commercial real estate property. We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report.

If you're not seriously involved in the entity, then none of this matters, obviously.

Side note: it's generally the norm for someone to personally guarantee a merchant account for a new business - I wouldn't call that silly.

> We turned down a prospective tenant because the owners' previous business had declared bankruptcy. How did we know about it? A simple credit report.

In the case of a sole proprietorship I can see how that link would be made, but otherwise it is highly unlikely that a shareholder/officer would be affected in this way.

Any new company must boot-strap their credit (and credibility) in some way. Generally this is done by an officer or owner tying their credit with the company's credit. I own majority in a C-Corp and when applying for a merchant account I was asked to backup the company with my credit and SSN as well as sign for the company with its EIN.

Ok, so you voluntarily agreed to do that, and in that case it makes sense.

But you were under no obligation to do that, and you being the majority shareholder is also a key element here.

The OP is not a majority shareholder, as far as I can see has no obligation to go in to this now and it would be a very bad move indeed to get his name on any paperwork where he privately assumes the debt of the corporation just 'because his name is already on the paperwork'.

It would make it easier, not harder to tie this to him in the future.

I think this "minority/majority shareholder" business is probably a misleading red herring. The point is that the company's creditors agreed to do business with a corporation, which is a separate legal entity from the officers of the corporation. Full stop.

If you personally guaranteed any of the company's debts --- and don't ever do that --- the story is obviously different. But if Rackspace invoices your company, you could own 99.9999% of its shares and most probably not owe a dime.

There are situations --- they vary from state to state --- that "pierce the corporate veil". Fraud is one of them, so is negligence, and so (in some crazy states) is payroll. What they tend to have in common is a tort: something an agent of the company explicitly did wrong to cause damages to another party. Signing a contract and not being able to live up to it is almost by definition not the same thing as a tort, which is why law students have separate classes in "torts" and "contract law".

True, but if you're a sole proprietor that makes it a lot easier to go after you.

A majority (but not sole) shareholder has a less hard time and a minority shareholder has nothing to worry about at all.

The difference between "sole proprietor" and "sole shareholder of a corporation" is large; these are two totally different business structures.

>If you personally guaranteed any of the company's debts --- and don't ever do that --- the story is obviously different.

My experience has been that if you are a small, new corp, nobody will give the corp any credit without a personal co-sign.

I don't think it's silly to personally co-sign stuff. I mean, it's not something to be done lightly, sure, but if you need a lease, you need a lease. sometimes you need to take the risk

Yes - assuming any of this debt is a terrible idea. But taking out a personal loan, investing it in the company in some sensible manner, and having the company pay off its debts could be a very smart thing to do considering the small amount of money in this case.

The take away is that a liability shield is not the same as a credit shield. Your credit will follow you, even if your debts do not. Some people care about this. Some don't.

For $17k, I'd surely think about my credit before walking away.

Let me get this straight, because I'm getting confused here, there is '0' proof for or against him being on the hook for his credit, but just for the sake of the argument let's assume that it is his personal credit that is linked to the merchant account (that would be spectacularly stupid, but ok).

You are suggesting that he take out a private loan even though he's already committed his savings to this venture to the tune of $17K in order to protect his credit rating?

Worst case he won't be able to borrow money for a while, and he might not be able to get a mortgage or other financing.

Would you borrow money in order to be able to borrow money later? It makes very little sense to me, to pay back $17K privately (so that's after taxes) means that you'd have to be earning roughly double that just to get rid of this debt, at a regular salary and expenses that comes down to at least two years before you can get rid of that debt, not counting the interest.

How does that make any sense at all, is your credit rating worth 20K and two years of your life to you?

Because I have more HN karma than I need anyhow...

First, no. I'm not suggesting that he do that. I'm suggesting that it's an option on the table.

Different strokes for different folks. My primary income requires that I be able to secure large amounts of non-recourse debt, for example. A guy might have a wife who expects to be able to buy a house in the near future. Some may not care that the lawyer they hired worked 10-12 hours without getting paid. Others will. For some people $17k may take two years to pay back. Others, not so much. Some people just want to make good on their commitments if at all possible.

Not everyone takes the by-the-numbers view of debt (legitimate though it may be). Those who don't will consider you a deadbeat for walking. What's the cost of that? The answer is different for everyone, and counseling someone to consider the aftermath is just plain sensible.

And a serious question: Where can you get a merchant account for a new business that does not require a personal guarantee? I'd love to know.

This is argument is so silly. Stipulate that everything you say is true. The possible outcomes are: the guy goes hugely into debt, or the guy can't open a merchant account on his own. You know what's worse than not being able to open a merchant account? Personal bankruptcy.

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